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U.S. wheat stocks are not tight

Wheat finished the day mixed to lower, today. The USDA Supply and Demand numbers were bearish compared to the trade’s expectation. The average trade guess for the report was 704 million bushels for U.S. carry-out and 176.54 million tonnes for world carry-out. The USDA released 716 million bushels for the U.S., which was an increase from last month’s 691 million bushels.  World carry-out was 178.23 million tonnes compared to last month’s 176.73 million tonnes. The majority of the increase came with a revision to India’s ending stocks. India’s stocks were increased by 1.85 million tonnes, which is where the USDA made its largest revision to wheat. India will lose money on export of any more government-sourced wheat. The cost to move the grain is too expensive for the international market, so we may see a slowdown in Indian wheat. India usually harvests much of its wheat starting in late March and lasting until early June. This could help push local prices down and could open the door to more Indian exports. The average farm price the USDA sees for wheat this year is 7.65 to 7.95. The change in the USDA numbers was a decrease of 25 million bushels in exports.  Compared to other years, we are not tight for U.S. wheat stocks. The forecast for the next two weeks for many of the wheat-growing areas does appear to look drier and warmer. The next major event the market needs to look at is the quarterly grain stocks report at the end of the month. These markets continue to trend lower and, for the time being, continue to trade the trend and look for lower trade.

Working Trades:

Sell May Chicago 708. Changed from 728 to 708. Objective 658.


Cattle Commentary

Today’s lower trade in cattle futures was not a cattle issue. USDA’s monthly supply/demand report added yet again to the 2013 meat supply picture. They added 618 million pounds to the chicken production estimate and 148 million pounds to turkey.  In their comments they suggested production was increased due to recently stronger chicken prices and expectations of lower feed costs later this year. As it stands right now, the latest measure of short-term chicken production, egg sets, was 1.3% higher than last year. The breeding herd, layers for broiler hatching, is running 1% higher than last year. There were minimal changes for beef and pork production (+15 and -50 million pounds). As it stands now, chicken production is forecast 2.4% larger than last year, turkey 3.5% larger, pork +0.5%, and beef -3.1%. Total meat production switched from a 0.4% lower forecast to now a 0.4%-higher-than-last-year estimate.

While USDA added to total 2013 meat production today, the cattle market took it as meaning all packed into the short-term market. As it stands right now, cash cattle traded to 128.50 this week. April futures settled at 127.55. Using normal basis levels for each week, the market is pricing in 128.43 cash cattle in the first week of April then 127.51 in the last week of April. Essentially, the market is saying this recent rally in cash cattle, from 123 in February to this week’s 128.50, is over. This expectation comes without any weakness in wholesale beef. Last week beef added $5 to $6. This week it gained $9 to $10. With good news in front of us, from lower market ready cattle numbers beginning this month, the trade is saying it will have no market effect. While we strongly disagree, as our target for April futures is $132 ($133 cash peak) this market wants to assume that demand will worsen. Even in the face of a very good employment report, the trade is assuming the worse. While we consider the current futures market to be sharply mispriced, we will go back to a neutral standpoint. It is markets like this that are why we use stops on all trading positions…Rich Nelson

Closed Trade:

(2/28) Bought April cattle 130.10/sold April 132 call 1.17, risking -1.25 (from entry). Exited today at -1.67 for -$670


Rich Nelson 

Allendale Inc. 


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